GOLD FUNDAMENTAL FORECAST: BULLISH
_Gold bulls scored a second weekly win despite Treasury yields briefly surging
_The Russia-Ukraine border situation is offering a geopolitical tailwind to bullion
_FOMC and PCE data are likely to inject volatility into markets - will it help XAU?
Gold bulls scored another win last week, with XAU/USD rising nearly a full percentage point, pulling the yellow metal’s monthly gain performance into positive territory. Treasury yields pulled back across the curve into the weekend. The 10-year Treasury yield hit the highest level since January 2020 before bond buyers stepped back into the market. A deep pullback in high-beta equities occurred amid the Treasury rout, with stock traders likely trimming growth forecasts amid a tighter outlook on Fed policy brought on by persistent inflation.
Speaking of inflation, breakeven rates – the gap between nominal and inflation-indexed yields – fell, with the 2- and 5-year measures outpacing longer-term measures. A drop in breakeven rates is generally bearish for gold prices, given the yellow metal’s inflation-hedging appeal. The 2-year breakeven rate, which measures what markets see inflation at 2 years out, fell to around 2.35% from 2.47% through the week.
That suggests another factor was at play for encouraging the gold buying seen last week. The most likely factor is the increasingly tense situation on the Ukrainian border. Gold appeals to investors as a hedge against volatility. A Russian invasion of Ukraine would certainly qualify as an event worthy of inducing a potentially tremendous amount of uncertainty in markets – and traders hate uncertainty. The Russia-Ukraine situation’s influence on gold is simple: if tensions increase, gold likely gets a boost and vice versa.
However, several economic events this week are also front and center for bullion traders. The Federal Reserve’s first rate decision of the year is set to cross the wires on Wednesday. Traders will key in on Fed Chair Powell’s commentary given that a rate liftoff isn’t expected until March. Mr. Powell’s words over the balance sheet will be put under a microscope. The Fed Chief may also push back on the view that the central bank may increase rates four times this year – which is likely too aggressive in his view. A tempered rate hike outlook could offer a tailwind for XAU prices.
That tailwind may receive a boost later this week when US inflation data receives an update via the personal consumption expenditures price index (PCE), set to cross the wires Thursday. The Fed has already capitulated that inflation is stickier than previously thought, so even a hotter-than-expected print may do little to firm up the hawkish stance among FOMC members. However, higher inflation could certainly support gold’s inflation-hedging appeal, especially if it follows a Fed event that trims rate hike expectations for this year.
_Gold bulls scored a second weekly win despite Treasury yields briefly surging
_The Russia-Ukraine border situation is offering a geopolitical tailwind to bullion
_FOMC and PCE data are likely to inject volatility into markets - will it help XAU?
Gold bulls scored another win last week, with XAU/USD rising nearly a full percentage point, pulling the yellow metal’s monthly gain performance into positive territory. Treasury yields pulled back across the curve into the weekend. The 10-year Treasury yield hit the highest level since January 2020 before bond buyers stepped back into the market. A deep pullback in high-beta equities occurred amid the Treasury rout, with stock traders likely trimming growth forecasts amid a tighter outlook on Fed policy brought on by persistent inflation.
Speaking of inflation, breakeven rates – the gap between nominal and inflation-indexed yields – fell, with the 2- and 5-year measures outpacing longer-term measures. A drop in breakeven rates is generally bearish for gold prices, given the yellow metal’s inflation-hedging appeal. The 2-year breakeven rate, which measures what markets see inflation at 2 years out, fell to around 2.35% from 2.47% through the week.
That suggests another factor was at play for encouraging the gold buying seen last week. The most likely factor is the increasingly tense situation on the Ukrainian border. Gold appeals to investors as a hedge against volatility. A Russian invasion of Ukraine would certainly qualify as an event worthy of inducing a potentially tremendous amount of uncertainty in markets – and traders hate uncertainty. The Russia-Ukraine situation’s influence on gold is simple: if tensions increase, gold likely gets a boost and vice versa.
However, several economic events this week are also front and center for bullion traders. The Federal Reserve’s first rate decision of the year is set to cross the wires on Wednesday. Traders will key in on Fed Chair Powell’s commentary given that a rate liftoff isn’t expected until March. Mr. Powell’s words over the balance sheet will be put under a microscope. The Fed Chief may also push back on the view that the central bank may increase rates four times this year – which is likely too aggressive in his view. A tempered rate hike outlook could offer a tailwind for XAU prices.
That tailwind may receive a boost later this week when US inflation data receives an update via the personal consumption expenditures price index (PCE), set to cross the wires Thursday. The Fed has already capitulated that inflation is stickier than previously thought, so even a hotter-than-expected print may do little to firm up the hawkish stance among FOMC members. However, higher inflation could certainly support gold’s inflation-hedging appeal, especially if it follows a Fed event that trims rate hike expectations for this year.